Assume US GAAP applies unless otherwise noted When market interest rates increase, will a company that issued fixed-rate debt prior to the increase in rates most likely experience an Economic loss…change in the amount of debt recorded on the balance sheet A no…no B. No…Yes C. Yes…No D. Yes…Yes I have no solution here, because i used the screen grab to save problems from the sample exam to review them. Any ideas??
I would choose C
No and No Answer A If debt is fixed-rate, then all the better, rates go up, but the company has locked in the lower rates, so no eco loss (profit if anything) the amount of debt recorded on the balance sheet won’t change, since it uses the rate AT ISSUANCE
A company makes economic profit. posted the same question a couple of days ago. http://www.analystforum.com/phorums/read.php?11,627072,627072#msg-627072
Wow. Really have to start reading the questions more thoroughly…
So he would record a gain. How would it be reflected?
I think A. Liability on bal sheet is not affected by current rates, but mkt rate at issuance. My thinking for the economic loss - they issued fixed rate debt right before increase so they locked in a lower rate and they are better off. Since economic profit takes into account compensation for cost of capital if a firm actually manages to finance cheaper than current rates I would expect an economic profit.
A: Its an Economic Gain, The company can go back to the market and buy back its debt at a discount. we just presented this strategy to upper management at work recently. Balancesheet takes into account the rate at issuance.
Agree with the others A: No No It will an economic gain instead. Also the current rate does not effect the liabilities.